1. 2016 CPA CONGRESS

2. SYDEY
10-14 October 2016
Full program now available cpaaustralia.com.au/congress

3. Valuation and Depreciation for the NFP and Public Sectors
David Edgerton FCPA
Director
APV Valuers and Asset Management

4. Outline Background and Context Overview of Valuation Guide Key Issues
Emerging Issues
Technology and the Future

5. Background and Context
Why are Fair Value and Depreciation so important?

6. Driven by primary purpose of financial statements
To provide useful information to general purpose users so that they can make informed decisions
For NFP and Public Sector – provides accountability to the general public

7. Fair Value and Depreciation
Fair Value: Provides information about the value (and general state) of assets controlled by the entity
Depreciation: Provides information about how quickly the assets are being consumed

8. Good Asset Management Performance
Assets generally in good condition
Typically lower lifecycle cost
Typically assets have longer useful life
Therefore –
Fair Value as % Gross should be higher
Depreciation Expense should be lower

9. NFP and Public Sector Different to Private Sector No ‘profit motive’
Assets based on ‘revaluation model’
Extremely high values

10. Materiality and Sensitivity
Fair Value dominates the Balance Sheet
Depreciation is one of largest expense items
Both –
Highly subjective
Based on range of assumptions
Care needs to ensure figures reflect reality

11. Valuation ‘Expertise’
Valuation under ‘Accounting Standards’
NOT ‘Market Value’ (i.e not valuing a residential house)
Typically ‘Cost Approach’ (under AASB/IFRS13)
‘Cost approach’ concept different to old DRC concept
Need to ensure –
Valuer is expert in ‘accounting standard’ valuation
Methodology has kept up with changes in standards and concepts

12. Valuation under AASB

13. Overview of Valuation Guide
Significant inconsistency in approaches, methodologies and understanding across jurisdictions
Includes valuers, entities and auditors !
CPA identified need for central guidance

14. Guides 2013 ‘International Guide” (IFRS & IPSAS)
2016 ‘Australian Guide’ (AASB)
Peer Review process
Extended reference group
Update for AASB May 2015 decisions
Update for new standards and concepts

15. Free Download

16. Inconsistency Many still stuck with ‘old approaches’
1980s – accrual accounting introduced
Recognised –
Did not know what asset we had
Did not where they were or what condition they were in
Valuation was used to capture the data
Valuation based on ‘accounting estimates’

17. Accounting was driving Asset Management
With limited knowledge basic accounting estimates were used to derive initial values
Often based on Useful Life and RUL estimates

18. However
Over past 35 years our data and Asset Management has significantly evolved
Modelling based on asset condition and alternative treatment regimes
Focus on optimising the lifecycle cost

19. Asset Management now needs to drive the Accounting
On-going cyclical renewal and maintenance
No link between ‘age’ and ‘value’
Changes in AASB13 definition and concept of Fair Value highlight –
Must take into account the factors that other market participants would take into account in pricing the asset
Generally – condition and obsolescence

20. Key Lesson
Asset Management data needs to drive valuations and depreciation
Fair Value and Depreciation are ‘outcome’ of asset management performance
Must be based on key ‘market factors’ such as condition and obsolescence
Many old ‘age based’ estimates do not reflect reality

21. IFRS v IPSAS Now major divergence in valuations
IPSAS did not adopt new IFRS Fair Value
New IPSAS Conceptual Framework ‘excludes’ Fair Value as a suitable method
New IPSAS approach yet to be developed
Fair Value under IPSAS17 not the same as Fair Value under IAS13
Entity Specific (IPSAS) verses Highest and Best Use Market approach (IFRS)
What does this mean for Australia?

22. Contents Overarching framework and considerations
Accounting Standards and Concepts
Valuation specific standards
Preparing for valuation
Post-valuation considerations
Audit Considerations
Guidance – Specific Asset Types
Linking to Asset Management
Appendices

23. Key Issues Change in definition of Fair Value Residual Value decision
AASB13 Disclosures

24. Change in definition and Concept
AASB13 ‘Current Replacement Cost’ – The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).

25. 11 A fair value measurement is for a particular asset or liability
11 A fair value measurement is for a particular asset or liability. Therefore, when measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Such characteristics include, for example, the following:
(a) the condition and location of the asset; and
(b) restrictions, if any, on the sale or use of the asset.

26. Fair Value now Market based approach Based on highest and best use
Taking into account factors that other market participants would take into account

27. CRC v DRC DRC conceptually different to CRC
(AASB13 and AASB136 amendments)
Old ‘Depreciated Replacement Cost’ removed
Replaced with new ‘Current Replacement Cost’
No link between Fair Value and Depreciation Expense

28. Or Combination of two or more approaches
Basics of Fair Value
Three techniques
Market approach
Income approach
Cost approach
From perspective of “market participants” not the entity
Or Combination of two or more approaches

30. AASB May 2015Decision Residual Value definition and disposal
‘Proceed upon disposal’
There need to relinquish ‘control’

35. Residual Value Decision
Additional level of componentisation (SL & LL)
SL & LL – ‘not physically identifiable’
Each part to be depreciated
OK to use ‘blended’ approaches
Depreciation to be based on ‘Depreciable Amount’
Valuation Depreciation different to Financial Reporting Depreciation (i.e. valuation and depreciation are NOT linked)

36. For example: 20m dredged channel
Valuation
Depreciation
Long
Fair Value
Replacement Cost
Short AD

37. Key Lessons
If component subject to renewal then need to split between SL and LL parts so that ‘each part can be depreciated separately’
OK to use blended approaches (weighted average at component level but NOT at whole of asset level)
Calculation of Fair Value has nothing to do with calculation of Depreciation Expense (methods that link them are likely to produce incorrect result)
Not ‘componentising’ to SL and LL will result in higher depreciation expense

38. Concerns
Old concept and approaches still in in use (many built into finance systems)
Driven by ‘doing it how it has always been done’ or ‘this is a simple approach’
Challenge –
Has methodology changed to reflect change in standards?
Is Fair Value based on Depreciation Expense?

39. SL / LL Componentisation
Will each ‘part’ be separate component in Asset Register or will you use ‘blended approach’
Impacts design of Asset Register
If use ‘blended’ you can keep one-to-one relationship between financial asset register and the asset management system components

41. Risk of Easy Option

42. AASB13 disclosures
AASB13 Asset Class different to AASB116 Asset Class

43. Disclosures General Disclosures (policies and reconciliations)
For each ‘Asset Class’
Valuation Techniques and Inputs
If level 3
For each level 2 input (no disclosures)
For each level 3 input
Where did it come from
How was it evaluated
Quantitative info (eg. min and max)
How reliable is it (sensitivity +/- %)
Impact ($) on Fair Value Measurement
Temporary Relief
(but only for specialised valued using cost approach)

44. Emerging Issues

45. Service Concession Arrangements
ED261 Service Concession Arrangements
Issued July 2015
aligned with IPSAS 32
If criteria are met then recognise in the books of the grantor –
Asset and
Corresponding liability (based on Financial or Right to Operate model)

46. Leases New AASB16 Applicable periods beginning after 1 Jan 2019
Finance and Operating Leases gone
ALL Leases now on books
May elect to exclude short-term or low value leases
Record asset & liability
Extensive disclosures

47. Technology and the Future

48. Key Drivers - Valuations
Quality –
Compliance
Getting through Audit
Figures make sense (reflect reality)
Timeliness
Meets entity’s needs
Flexibility and Communications
Cost

49. Valuation Options
External Valuer
Internal Staff
Software

50. Choosing the best method
Need to consider
Knowledge and expertise
Experience and capability
Efficiency and resources
Risk of error
Ability to deliver on time
Ability to handle audit queries
Full Cost (including hidden costs)

51. The best solution? Depends on your circumstances
In ideal world …. Collaborative mix of
External Valuer (specialist knowledge and expertise to reduce risk and improve efficiency. )
Internal Staff (lower cost and better local knowledge)
Software (take control over your own data and lowest long-term cost. Internal staff build capability over time).

52. Examples 5 Northern NSW water entities
APV provides capability and facilitates consistent methodology and assumptions
Councils provide data and local knowledge
FVP used to undertake the valuation. Full access to all data by councils and audit

53. Examples Government of Vanuatu
Project is to identify and value all assets and build GoV capability
APV provides capability and training in valuation
GoV staff (with assistance from APV) inspect assets and capture data
FVP used to bring all data together and produce valuations and financial reporting disclosures

54. Conclusions Subtle but significant changes in standards and concepts
More changes on the way
Inconsistency still an issue
Need to move away from old ‘outdated’ approaches
Ensure ‘full compliance’ with new concept
CPA provides a central point of professional guidance through the Guide to Valuation and Depreciation

55. Questions
David Edgerton FCPA Director APV Valuers and Asset Management